Brokerage and financial advisory firms are studying the recently
released federal Public-Private Investment Plan to see how they can
profit from the complex program. The two-part plan provides loan
guarantees for the purchase of troubled loans under the Legacy Loan
Program and securities under the Legacy Securities Program, including
those written on commercial real estate. The Legacy Securities Program
would tap into funds created through the Term Asset-Backed Securities
Loan Facility, known as TALF. The government hopes that credit will
free up as bad debt is removed from bank balance sheets. Experts say
that because the plan is still under development it is difficult to provide
specific examples to New York City, but The Real Deal spoke to three real estate pros to get their take on the local commercial real estate implications.
Robert Knakal, chairman of Massey Knakal Realty Services
What are you doing as a firm to take advantage of the federal programs?
What we will be doing is tracking which banks are participating in the program, which may indicate that they are prepared to put more money out into the marketplace.
What types of banks do you expect to participate in the programs?
Unless the lender is prepared to put in a massive amount of loans or securities … they are not going to participate in the program. I am thinking… well into the 9 figures.
Meaning, in general, banks with more than $500 million in distressed assets will participate?
Yes, I think something like that. I think any individual loan for $50 million or less, is very likely not going to be sold into the [federal program] because an individual investor can buy that loan and finance the acquisition of that loan. I think the portfolio lenders are much less likely to use this program.
As a brokerage, is there a way to compete or work around the federal program?
To the extent a bank has an individual loan — an individual asset — we can sell that loan to the real estate investor that wants to end up owning that real estate.
Among the loans on the approximately 8,000 multi-family, retail and mixed-use properties valued under $100 million that sold between 2005 and 2007 in New York City, how many do you believe could be drawn into the federal program?
I would say maybe 15 percent were between $50 and $100 million and those are the ones that are more likely to be included in a [federal] program sale than the smaller ones, but again everything depends on the perspective of that lender.
What aspects of the current credit squeeze are not addressed by these federal programs?
The biggest problem is if [a property owner] has debt that is higher than the value of their property this program does absolutely nothing for them. The owner of the property is still completely at the mercy of whoever has the loan.
Patrick Hanlon, principal at financial advisory firm Ackman-Ziff Real Estate Group
What are you doing to prepare for and engage in the federal Legacy Loan program?
Through our AZ-Garnet Loan Sale Advisors platform we are actively pursuing contracting opportunities with FDIC and other federal government agencies. Garnet is currently under contract with the FDIC as a valuation contractor, and we are looking to apply our service offerings in this and other areas.
What types of properties do you think will likely go through the federal program first?
There are $230 billion nationwide of loans currently 90 days past due that are eligible for the program as of today. Every asset class is included. Obviously land and construction loans are prevalent, and we think the cash flows of office, retail and hotel deals are more at risk than say, multi-family, so there may be a higher incidence of those asset types. It’s more important to understand that decisions to sell loans have less to do with what the collateral type is and more to do with the strategic decisions of the lender. Different owners of those notes and paper are making decisions to sell or not to sell based on many factors.
What are obstacles to the program particular to New York City?
From a practical standpoint, the main hurdles that differentiate New York are the shear volume of deals here; the average size of the deals and the high concentration of large loans, many of which were securitized in commercial mortgage-backed securities or syndicated to multiple lenders with varying agendas; the relative difficulty in unwinding securitized, syndicated or mega-tranched deals; and the vast number of stakeholders in all of these structures. It’s not as easy as a lender simply deciding to sell a note through the Legacy Loan Program.
Barry Hersh, clinical associate professor at the Schack Institute at New York University
How can real estate brokers profit from the federal program?
If someone bought 10 loans there might be three they want to sell and then hire a broker. Most brokerage firms have advisory services, so they might be on the upfront side evaluating a portfolio.
Does the sale of the loan provide any automatic benefit to the property owner, or can the new owner still foreclose on the real estate?
Just because they bought it for less [does not mean mortgage payments will be less]. If the note was $10 million, they bought it for $6 million, they could settle for $8 million [with the borrower]. But some note buyers might say no because they want to take over the property.
What does the new program mean for commercial brokerage activity, which is down about 50 percent?
One thing to think about is what happened in 2005, 2006 and 2007 when you had this amazing deal velocity. Buildings were bought and eight months later they were sold. Every time you do that you generate fees and commissions. What happened is velocity slowed dramatically. What this [program] might do is generate more turnover and more deals, not just for a real estate broker but a mortgage broker, lawyer, appraiser.
[This is the first in a two-part series on how the federal loan guarantee plan affects New York City real estate.The second part will be on the residential market.]